Earnings Before Tax Definition & Example

Earnings Before Tax (EBT) Definition


The earnings before tax (EBT) is the amount of earnings less income tax expenses.  This method of evaluating a company is used to assess how profitable companies are from different geographical regions.

Earnings Before Tax Formula


EBT = Gross Revenues - Income Tax Expenses

Assessing Earnings Before Tax


The earnings before tax can be found on a company's income statement.  For example, let's say an investor is looking to put their money to work in a mattress producing company.  Company A operates out of Brazil, with an extremely low P/E ratio and is hitting record profits.  However, Company B is located in the U.S., but the per share earnings are slightly lower.  This investor would immediately think that Company A is a better investment, but upon further review the investor notices that the Brazilian government has lowered the tax rate to 3%, but this rate will go back to the standard 15% in the next 3 months.  Hence the net income of Company A will be less than Company B in the near future and is not the best investment.

The above example detailed a scenario where the EBT was the smoking gun, but remember that analyzing a corporation's finances is more art than science and requires an extensive fundamental analysis education.
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